Vivek Sharma
Financial Planner and Trainer
RBI credit policy is one of the most talked about events in the stock market. Whenever credit policy announcement approaches, market becomes agog with the shape that the policy announcements will provide to the economy in general and market in particular. One of the key aspects of policy announcement is repo rate changes by the regulator. Repo rate is the key driver for lending in the economy and banks take their call on lending rates based on the changes in repo rate. Though sometimes CRR cut also acts a stimulant in lending rate changes, repo rate has an edge over CRR in terms of deciding lending rates.
How important is repo rate cut for the stock market in general? Is it worth the hype that engulfs the entire stock market immediately before the credit policy announcements? Last but not the least; is it a good omen for market? In order to get an answer to all the questions above, let us have a look at the repo rate changes made by RBI during since 16th Sep,2010 when repo rate started moving northwards after RBI increased it to 6 percent.
| Date | New Repo Rate | Change in Sensex | Closing Value of Sensex |
| 16-Sep-10 | 6% | -85 | 19417 |
| 02-Nov-10 | 6.25% | -10 | 20345 |
| 25-Jan-11 | 6.50% | -180 | 18969 |
| 17-Mar-11 | 6.75% | -200 | 18149 |
| 03-May-11 | 7.25% | -460 | 18534 |
| 16-Jun-11 | 7.50% | -150 | 17985 |
| 26-Jul-11 | 8% | -363 | 18518 |
| 16-Sep-11 | 8.25% | 57 | 16933 |
| 24-Oct-11 | 8.50% | 144 | 16939 |
| 16-Apr-12 | 8% | 56 | 17150 |
| 30-Jan-13 | 7.75% | 14 | 20005 |
| 19-Mar-13 | 7.50% | -285 | 19008 |
Source: Closing price of Sensex considered, values rounded off
Post Sep, 2010 till Jul 2011, whenever repo rate was hiked Sensex reacted negatively to the news. In fact, when RBI hiked repo rate by 50% basis point on 03rd Mar,2011, Sensex tanked almost 460 point. This was the time when market realized that the hike would make a significant impact on the cost of capital of the companies and will drive profitability down for the companies in general. However, when repo rates were upped to 8.25 percent and 8.50 percent respectively from their previous levels market infact reacted positively as there was a confidence built in the market that the rates won’t go up significantly and these the rate hikes have plataeued now. On the other hand market has been indifferent to some of the rate cuts as well. A 50 basis point cut in the rates on 16th Apr, 2012 failed to provide any major fillip to the market as Sensex moved only 56 points.
Another interesting aspect to note is that market was at 17985 when repo rate was at 7.5 percent on 16-Jun-2011 while it ended up at 19000 on 19th March when the rates once again came back to 7.5 percent. Additionally compared to 16th Sep,2010 when Sensex ended at 19417 when the repo rate was at 6 percent, Sensex was also almost at the same level on 19-Mar-2013 just before the news of withdrawal of support by DMK came. So repo rate move from 6% to 7.5 percent, there was no significant changes in the level of Sensex.
Every time when the repo rate changes are announced, the broad based market has a tendency to react sharply to the news. Change in repo rate acts like double whammy for the stock market. Increase in repo rate not only means change in the cost of capital for business but it also redistributes investment in favour of deposits which offer higher rate of return. The same happens when the repo rate is cut. But the most important thing to note here is that while market may react to news sharply on the date of repo rate change announcements real impact comes only over a period of time. A rate cut of 25 basis points may not have significant bearing on the market. The rate must fall below the threshold limit which gives comfort to the market which can be around 6 percent. We have a long way to go for that.
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